If you were to ask anyone on the street what came to mind when they thought about Bitcoin, no doubt the wild price swings would something that they mention. This is a fair characterisation as Bitcoin has exhibited some really intense volatility over its history.
When people think back to the early days of Bitcoin, it was not unusual to see swings of at least 60% on daily basis. However, it seems as if the mass liquidity that has recently flowed into market has had a dampening effect on the volatility.
Indeed, the daily trading volume on Bitcoin is about $4.5bn which is now more than that of Apple. This may indeed be a great argument for increased adoption.
Although the excessive volatility that used to be present with Bitcoin was a great thing for day traders, it was a major barrier to large scale adoption. Indeed, the volatility was one of the main arguments against retail investors allocating a portion of their portfolio to it.
For example, the president of the ECB (European Central Bank), Mario Draghi stated that the Bitcoin market was not mature enough to consider any regulations from the central bank. He claimed that the financial crisis taught us that financial innovation should be embraced with attention placed on the potential risks.
These statements might be a bit stale though. This is because Bitcoin has matured quite a bit over the past year and other central banks are considering regulations of their own. Countries in Asia such as South Korea and Japan are in the process of introducing financial regulation for the currency.
This could possibly coincide with the marked decreases in the volatility in Bitcoin whichcan be seen by the volatility chart from prominent Bitcoin analyst, Chris Burniske on Twitter.
As liquidity increases, Bitcoin's daily volatility drops. Chart by @cburniske. pic.twitter.com/JsliQZzlGf
— Tuur Demeester (@TuurDemeester) October 22, 2017
As one can see, the annual daily volatility in the price has fallen from about 10% back in late 2011 to about 4% today.
Benefits of Lower Volatility
Of course, as more people start entering the market and trading volume continues increasing, so will volatility reduce in a positive feedback loop. Increased liquidity means that price swings are less likely to occur as there are more participants to meet large bids / offers.
One should be careful of increasing volatility when the price is also increasing. It always a positive indicator for Bitcoin as mentioned in a 2015 tweet by Andrea Antonopoulos:
Don't be too excited with recent bitcoin short squeeze and rapid price climb. Volatility is bad even when it's going upwards #chillout
— Andreas (@aantonop) October 29, 2015
In this case, however, it is quite refreshing to see that the price of Bitcoin and Market Capitalisation has increased so much while volatility has steadily been declining. It is probably an indication of the underlying demand for holding Bitcoin and not just blind speculation.
Hopefully as more regulations are introduced and derivatives and investment products such as ETFs are launched, we are likely to see a further fall in the volatility of the coins.
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